External constraint and procyclicality of monetary policy of the Bank of Central African States (BEAC)

Monetary policies are known as procyclical in developing countries. For instance, there exists a consensus on the main factors of this monetary policy procyclicality: (i) procyclicality of capital flows in emerging markets, and (ii) weak institutional framework in Sub-Saharan African countries. However, hard peg regime requirements (in terms of FX reserves level to possess) and the importance of terms of trade shocks in Franc Zone countries prompts us to reconsider this debate and to explore other factors, especially for central African countries. In this paper, we analyse the important role of external constraint (FX reserves to imports ratio, the de facto nominal anchor) in the BEAC’s monetary policy procyclicality. Using a general equilibrium model with some structural features of central African economies, we demonstrate that: (i) a monetary shock has a more volatile effects on real variables in the current monetary policy framework than in an Inflation Targeting (IT) regime, (ii) the current monetary policy framework in Central Africa suggest a monetary tightening following a negative macroeconomic shock, and (iii) the delayed restrictive reaction of central bank following a negative oil shock induce additional macroeconomic costs. This results suggest: (i) to include the question of monetary policy procyclicality in the agenda of monetary reforms, and (ii) to consider the possibility of another nominal anchor for BEAC’s monetary policy which combines the monetary policy’s countercyclicality and the possibility to defend the currency.